GLOBAL ECONOMY

Puerto Rico's development bank warns of government shutdown in next 3 months

SAN JUAN, PUERTO RICO - APRIL 28:  (PUERTO RICO OUT)  Tens of thousands march towards the Capitol building April 28, 2006 in San Juan, Puerto Rico,  demanding the legislature to approve a line of credit that would avoid the goverment from shutting down May 1, 2006 affecting over 200,000 public employees. The demonstration was called "Puerto Rico Grita" or "Scream Puerto Rico".  (Photo by Jose Jimenez-Tirado/Getty Images)

SAN JUAN, PUERTO RICO - APRIL 28: (PUERTO RICO OUT) Tens of thousands march towards the Capitol building April 28, 2006 in San Juan, Puerto Rico, demanding the legislature to approve a line of credit that would avoid the goverment from shutting down May 1, 2006 affecting over 200,000 public employees. The demonstration was called "Puerto Rico Grita" or "Scream Puerto Rico". (Photo by Jose Jimenez-Tirado/Getty Images)  (2006 Getty Images)

Puerto Rico's Government Development Bank warned Wednesday that it is very likely the U.S. territory's government could be forced to shut down in the next three months because of a lack of funds.

The bank made the warning in a letter made public a day after it was sent to Gov. Alejandro García Padilla and the presidents of the island's Senate and House of Representatives.

"The island's financial state is extremely uncertain," the letter said. "A government shutdown would have a devastating impact on the economy, with salary and public-service cuts, and a long and painful recovery."

Bank officials said in the letter that the government's fiscal problems will prevent it from selling more bonds in the capital market as planned, and they urged legislators to immediately implement measures to cut costs and balance the budget. The government had been preparing to issue more than $2 billion in bonds in the coming months in part to strengthen debt-ridden agencies.

Bank officials said the government needs to approve a 5-year plan to help reduce a $73 billion public debt as well as approve sweeping changes to the island's troubled tax system.

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Once the government does that and presents a balanced budget, then it can be in a better position to issue bonds, said David Chafey, president of the bank's board of directors.

"Time is passing, and it's passing quickly," he told the Associated Press. "We need to provide investors with some kind of comfort."

Economist Charles Blitzer, a former World Bank and IMF official, said he wasn't surprised by the bank's assessment, adding that U.S. investors overall have known that liquidity is very low.

"What's a surprise is typically one agency of the government doesn't write to the rest of the government in quite this way," he said in a phone interview.

The letter was issued as García faces opposition from members of his party on a measure that would impose a 16 percent value-added tax that he says is needed to help generate more revenue. House of Representatives President Jaime Perello said a group of legislators had reached a tentative agreement to impose a 14 percent value-added tax, adding that he expected the House to vote on the measure soon. Chafey said the measure is a key tax reform component.

If passed, the measure would then go to the Senate. A message left for Senate President Eduardo Bhatia was not immediately returned.

Puerto Rico's government last shut down in May 2006 amid a budget shortfall resolved by an emergency loan. The two-week partial shutdown closed Puerto Rico's public schools and idled half of the central government's workforce. It also prompted Moody's Investors Service to cut the rating of the territory's general obligation bonds.

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